Month: August 2011

There’s a lot of talk of fracking (hydraulic fracturing) of shale gas in New Brunswick right now. In addition, there’s been some criticism of the showings of the movie “Gasland” around the province, saying the anti-fracking film inflames the public with inaccurate information. Environment Minister Margaret-Ann Blaney suggested recently that the film had been discredited. Some advocates argue the film’s contentions and information have never been disproved.

I’m neutral on fracking and still learning details about this technology. But, I found an interesting article on Twitter today linked from the anonymous tweeter, NBCynic. It’s a four page document published by the State of Colorado Oil and Gas Conservation Commission, which analyzes the movie and purports to set the record straight on its claims.

It’s worth a read, if for no other reason than to hear the other side of the story from a reputable government agency. You can find it here.

This statement caught my attention. Probably not many students will be affected? It doesn’t sound very certain, does it? I mean, doesn’t the Minister and her staff know exactly how many students and their families will be affected? The statement above sounds a bit like she’s guessing (or hoping?) that no one will be affected negatively.

If one digs a bit deeper it’s clear that the Minister knows exactly how many students’ families will be impacted by the parental contribution change. During main estimates on April 15, the Minister provided the stats on exactly how many students’ families are affected by the change in parental contribution rules. Although the Minister couldn’t answer the question when it was posed to her during Question Period (starting at 21:20), she was able to provide the numbers later in the day:

Doesn’t sound like “probably” not many students or families affected, does it? The Minister knows very well that the change to parental contribution would affect 29% of the approximately 15,400 students who received loans in 2010-2011, totalling about 4,465 students. That’s almost 4,500 families who need to come up with additional funds to support their adult dependents’ studies.

When a middle-class family is supposed to come up with extra thousands in unplanned funding in these challenging economic times, how can the Minister say they aren’t affected? Clearly, her statement must mean that families of a certain income level can “probably” come up with the extra money. The government’s argument is that it’s the parents’ responsibility to contribute to the first four years of their adult dependents’ post-secondary education, so go find the cash.

In fairness, maybe some families can find the extra funds. Maybe the parents can take out (or co-sign) a private loan with higher interest rates and no repayment grace periods. (These private loans are also ineligible for consideration as part of the post-graduate debt reduction programs, like the New Brunswick Timely Completion Benefit.) The department’s numbers say that 11.3% of student loan borrowers have household incomes of over $100,000; perhaps these families can live more modestly and make it work.

But, perhaps many can’t.

Did they consider that families who may be experiencing financial hardship despite their higher than average incomes?

Fact is, PETL doesn’t know. They admit on pages 39-40 of the hansard that the impact of the change on overall accessibility was never studied.

Regardless, don’t mistake the Minister’s meaning when she says that students and families “probably” won’t be affected. They are definitely affected. They know this change will directly impact almost 4,500 families of adult dependents studying at post-secondary institutions.

What the Minister really means is despite being worse off for up to four years of an adult dependent’s post-secondary education, she is guessing that thousands of New Brunswick families will be able to figure it out. It’s a $1.6 million gamble that affects the post-secondary education of almost 4,500 young adults and the financial well-being of their families.

I decided to do some homework on the issue of parental contribution, how it’s calculated, and how we compare to other provinces in Canada. First, here are some quick points on parental contribution and how it works.

Who must pay parental contribution?

Students are considered to be dependent on their parent(s)/step-parent(s)/legal guardian(s) if they:

have not been out of high school for 4 years; and

have not been in the labour force for 2 periods of 12 consecutive months, while not studying full-time at a post-secondary educational institution; and

have never been married and do not have physical custody of any children. (Source)

How is parental contribution calculated?

To its credit, the government is transparent with the formula, and with enough time and effort you could do the math yourself if so inclined.

It starts with your family’s income after income taxes, CPP, and EI are deducted. Then, a number from Statistics Canada called the “moderate standard of living” is deducted, which reveals what the government considers to be your discretionary income. The discretionary income is what the government says is available to support a dependent’s post-secondary education.

The “moderate standard of living” rates for New Brunswick are:

What is considered when calculating the “moderate standard of living”? HRDC defines the calculation as a “measure of the costs of living for the parents of dependent students, which includes the costs for various family sizes for shelter, food, household operation, child care, furnishings and equipment, clothing, transportation, health and personal care, reading material, life insurance premiums, pension contributions, charitable donations, and other miscellaneous expenses.” (Source)

Here’s a quick visual from the GNB web site to summarize how government comes up with a family’s discretionary income:

Once PETL has calculated a family’s discretionary income, it uses a subsequent formula to determine the overall parental contribution.

Was that formula enough to trigger your math anxiety?Don’t worry, the government provides a handy parental
contribution calculator to run the numbers for you.We’ll be using that later on.

Why is the “Moderate Standard of Living” calculation so important?

Here are the moderate standard of living numbers for all provinces and territories in Canada used to calculate discretionary income that could be contributed to a dependent’s post-secondary education.

Take a close look at that chart above. Note that New Brunswick has the lowest numbers in almost every family size category. The only exception is Newfoundland and Labrador in family sizes of 2-4 members. In other words, government has made the determination that New Brunswick has the lowest cost of living in Canada based on information from Statistics Canada. So when determining how much a parent in New Brunswick can pay, the assumption made by PETL is that a “discretionary income dollar” goes further for a New Brunswick family than just about every other family size in any other province.

Here’s the bottom line: if your cost of living is lower in New Brunswick, you can afford to pay more towards your child’s education. I ran some scenarios through the government’s parental contribution calculator to see how New Brunswick compared to other provinces. Check this out:

Scenario 1: Family of four with two parents and one dependent attending a post-secondary institution, study period of 34 weeks. Calculation assumes that both parents make approximately the same gross income. Top line is annual household income.

$ 45,000.00

$ 61,000.00

$ 80,000.00

$ 100,000.00

$ 120,000.00

BC

$ –

$ –

$ 233.22

$ 1,172.99

$ 4,557.82

AB

$ –

$ –

$ 176.46

$ 1,059.39

$ 4,292.42

SK

$ –

$ –

$ 1,071.89

$ 2,993.52

$ 6,765.43

MB

$ –

$ –

$ 977.02

$ 2,499.86

$ 6,179.19

ON

$ –

$ –

$ 323.57

$ 1,070.10

$ 4,233.81

NB

$ –

$ 72.03

$ 2,003.00

$ 4,183.71

$ 7,879.24

NS

$ –

$ –

$ 945.88

$ 2,381.10

$ 6,058.33

PE

$ –

$ –

$ 1,337.47

$ 3,490.15

$ 7,227.54

NL

$ –

$ –

$ 1,646.29

$ 3,569.64

$ 7,179.39

YK

$ –

$ –

$ 623.92

$ 2,429.83

$ 6,423.00

Scenario 1 – Family of four with one dependent attending a post-secondary institution.

Scenario 2: Family of three with two parents and one dependent attending a post-secondary institution, study period of 34 weeks. Calculation assumes that both parents make approximately the same gross income. Top line is annual household income.

$ 45,000.00

$ 61,000.00

$ 80,000.00

$ 100,000.00

$ 120,000.00

BC

$ –

$ –

$ 1,223.74

$ 3,027.31

$ 6,841.06

AB

$ –

$ –

$ 863.37

$ 2,230.72

$ 6,006.29

SK

$ –

$ 161.74

$ 2,268.57

$ 4,720.23

$ 8,492.14

MB

$ –

$ 106.32

$ 2,083.00

$ 4,230.76

$ 7,910.08

ON

$ –

$ –

$ 1,165.48

$ 2,464.08

$ 6,159.62

NB

$ –

$ 627.63

$ 3,484.59

$ 5,665.30

$ 9,360.84

NS

$ –

$ 68.93

$ 1,994.24

$ 4,085.50

$ 7,762.73

PE

$ –

$ 373.75

$ 2,801.13

$ 5,218.27

$ 8,955.65

NL

$ –

$ 581.26

$ 3,320.19

$ 5,243.54

$ 8,853.30

YK

$ –

$ –

$ 1,343.82

$ 3,911.38

$ 7,904.55

Scenario 2 – Family of three, one dependent attending a post-secondary institution.

Scenario 3: Single parent with one dependent attending a post-secondary institution, study period
of 34 weeks.Top line is annual household income.

In summary, according to federal and provincial documents and calculators New Brunswick families pay not only the highest amounts of parental contribution in the Atlantic Provinces, but the highest levels of parental contribution in the country. The government’s collateral suggests that this is due to having the lowest “moderate standard of living” calculation, which means the government believes we have the lowest cost of living.

Granted, it’s hard to compare New Brunswick to all of the other provinces dollar for dollar due to the varying cost of living across the country. That said, New Brunswick’s contribution level is still significantly higher than level of contribution from the Atlantic Provinces, as much as 10-20% higher on average.

Between 2007 and 2010, the impact of this calculation would have been softened by the elimination of parental and spousal contribution on 40 percent (the provincial portion) of a student’s loan dollars. But, since the reinstatement of parental contribution by the present government to save $1.6 million, New Brunswick families are now expected to pay more to send their kids to university and college than anyone else.

I started with credit rating by Standard and Poor’s. Hatfield is right; New Brunswick is the only province with a “Negative” outlook rating from S&P. This outlook change happened in June 2011, when they said the following:

“Credit concerns include our view of the significant deterioration in the province’s budgetary performance since fiscal 2009 (year ended March 31, 2009), which continued in fiscal 2011… In addition, New Brunswick’s relatively high net tax-supported debt burden (net of sinking funds), rose further in fiscal 2011 to about 33% of GDP from about 30.6% in the previous fiscal year. The province expects it to rise further to about 36% in fiscal 2012… The negative outlook reflects our expectation that New Brunswick’s budget plan will not be enough to return the province to a balanced budget position in the medium term. Standard&Poor’s expects that as a result of this, the province’s net tax-supported debt burden will rise significantly beyond the level outlined in the fiscal 2012 budget.” (Source)

So yeah, not good news. However, in the same release S&P affirmed our long-term issuer credit rating of AA-, keeping it status quo. No downgrade. I know that’s cold comfort to some, but again my goal is to try to gather some objective viewpoints of the province’s finances. If we were indeed in a “fiscal crisis”, wouldn’t our credit rating have been downgraded? Perhaps it would be over time if we stayed on the same path, but it was never the plan to stay on the same path. The former Liberal government says the deficit spending was a short term measure to keep people working during the “Great Recession”. Fraser noted on Twitter that the Federal Tories followed the same plan. So agree or disagree, fact is even though the outlook was downgraded, the credit rating remained the same.

But, how do we compare in terms of our credit rating to other provinces? Here’s a breakdown (by the way, this table isn’t on Standard and Poor’s web site, I had to search for each province individually to pull it together.)

Despite our present “fiscal crisis”, our S&P credit rating is the highest rating in the Atlantic Provinces (including “have” province of Newfoundland and Labrador). It’s also the same credit rating as Ontario and a higher credit rating than Quebec.

So that’s Standard and Poor’s rating. It’s nothing to write home about like BC, AB and SK, but it’s by no measure the worst. Compared to our Atlantic Canadian peers and Quebec, we are leading the pack.

How about Moody’s credit rating? The last rating was a year ago in August 2010, but at that time they held the rating at “Aa2”. Moody’s said:

“(T)he Canadian province’s Aa2 rating reflects a high degree of fiscal flexibility, manageable debt levels within the current fiscal framework and strong and reliable transfers from the federal government. The rating also reflects the province’s diversified economic base, offset by a weaker near-term revenue outlook and risks associated with the Point Lepreau nuclear generating station refurbishment project… New Brunswick has also recorded cash financing requirements in recent years, which has marginally increased the province’s debt burden, though the province’s net direct and indirect debt as a percentage of GDP remained relatively stable as the stock of debt grew broadly in line with GDP. However, the province’s debt burden increased to 113% of revenues at March 31, 2010 and is projected to increase to 133% of revenues by March 31, 2011, owing to large cash financing requirements recorded and estimated for 2009-10 and 2010-11.” (Source)

Here’s how we compare: (Again, this table isn’t on Moody’s web site, I had to search for each province individually to pull it together.)

(Incidentally, a “Aa2” credit rating is also shared by the New England states of Maine, Connecticut, and Rhode Island. Other New England states have higher ratings. New York also has an “Aa2”. New Jersey is “Aa3”.)

A (A1, A2, A3): Moody judges obligations rated A as ‘upper-medium grade’, subject to ‘low credit risk’, but that have elements ‘present that suggest a susceptibility to impairment over the long term’. (A+, A and A- in S&P)”

“Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.” (Source: Moody’s Rating Symbols&Definitions, page 9)

How do we compare to other Canadian provinces according to Moody’s? Well, we are on par with other Atlantic Provinces as well as Quebec. We have the same rating as half of the New England states and New York. Also, our outlook is presently “Stable”, not “Negative” like the S&P rating.

Hatfield did mention that New Brunswick’s rating from Moody’s was downgraded in 2009 under the Liberal government from its rating of Aa1, which it earned in 2006 under Lord’s Tories. This is also true. In the release where the reduction was announced, Moody’s said:

“As a result of anticipated borrowing requirements, New Brunswick’s debt metrics are projected to weaken over the medium-term. Moody’s anticipates that net direct and indirect debt may increase to over 150% of revenues over the next four years, from an estimated 106% in 2008-09. Debt metrics of this magnitude would remain consistent with other Aa2 rated Canadian provinces and international peers…’Even though New Brunswick, similar to that of all Canadian provinces, benefits from a high degree of fiscal flexibility, the province’s long-term financial capacity to service its debt is also conditioned by an economic base that underperforms the national average on a number of growth, income and wealth metrics,’ says Mr. Marion.”

Not great news there. But, check out the next paragraph of the release:

“The rating action also reflects Moody’s assessment of the risks associated with New Brunswick Power (NBP). The narrowing of NBP’s margins in recent years, in conjunction with high leverage and risks related to the refurbishment of the Point Lepreau nuclear generating station, represents an element of risk for the NBP. As such, NBP’s provincially-guaranteed debt, which is borrowed by the province and on-lent to NBP, constitutes a contingent liability for the province.”

Moody’s lowered NB’s credit rating not only based on our debt picture, but also based on liability related to NB Power. This is the same crown corporation that Energy Minister Craig Leonard says has its debt under control. Moody’s mentions not only liability related Point Lepreau but also the overall debt and profitability, which aligns more closely with the views of former Energy Minister Jack Keir. So, even if Minister Leonard thinks NB Power is doing just fine, its finances played a key role in the province’s credit rating downgrade. It appears that Moody’s doesn’t agree with Minister Leonard’s assessment of the risk NB Power’s finances pose to the province.

In summary, Moody’s sees us as on par with many of our peer provinces and states. Will that change when the next review comes out (this month perhaps)? We shall see.

Ok, so perhaps you may be persuaded that our credit rating is average when compared to others. How does our debt compare to other provinces? As Tim Jacques pointed out in the past, perhaps the fairest assessment might be comparing our Net Debt to GDP ratios. The Royal Bank just released new statistics in June 2011:

Here again we see our Net Debt to GDP ratio is worse than British Columbia, Alberta, Saskatchewan, Manitoba and Newfoundland. But, we are doing better than Ontario, Quebec, Nova Scotia and the federal government (latest stats for PEI are missing).

Am I saying that New Brunswick doesn’t have a serious financial situation? Of course not. Do we have a lot of work to do to resolve the deficit and debt problem? Absolutely. But, I’m weary of the hyperbole from the government and its supporters on our province’s financial standing. We all know that the state of the province’s finances needs to be addressed and the deficit must be eliminated in the upcoming years. But while the government and its supporters want us to believe that the Liberals left us on the brink of financial ruin, it seems to me that we are at the median of our Canadian peers when comparing credit ratings and debt. We can do better, but perhaps we can dial down the “financial crisis” rhetoric a little bit. Also, we should be very critical about what we are giving up in the name of fiscal austerity.